Commissioner Of Income-Tax, Tamil Nadu-I, Madras. v. Madras Fertilisers Limited, Madras High Court, Judgment, Law, casemine.com

Factual and Procedural Background

The Revenue caused the Income-tax Appellate Tribunal to refer two questions of law to this Court. The assessee is Madras Fertilisers Limited. For the assessment year 1971–72 the Assessing Officer (ITO) made an assessment on 28 August 1972 determining a total income of Rs. 10,28,050. Of that amount, Rs. 10,51,247 represented interest on dollar short-term deposits placed with Chemical Bank, New York, and Rs. 51,822 represented short-term rupee deposits in the State Bank of India; there was also interest of Rs. 2,934 on Tamil Nadu Electricity Board bonds.

The ITO levied interest under section 215 of the Income-tax Act, 1961 (the Act) at differing rates for two periods (9% for 1 April 1971 to 31 March 1972 — Rs. 50,889; and 12% for 1 April 1972 to 28 August 1972 — Rs. 120,705), calculated with reference to the then assessed tax of Rs. 5,65,428.

The assessee appealed to the Appellate Assistant Commissioner (AAC) and thereafter to the Tribunal. The Tribunal (order dated 30 September 1975) upheld the AAC's computation reducing total income to Rs. 95,125 (as against the original assessment of Rs. 10,28,050). The Tribunal remitted the question of levy of interest under section 215 to the AAC for fresh consideration. The AAC held the levy of interest on the revised total income of Rs. 95,125 to be in order; the assessee's plea that it genuinely believed it had no taxable income was rejected. The assessee again appealed to the Tribunal on the interest point. The Tribunal construed sections 215 and 194A and held that interest under section 215 could not be levied because the tax in respect of the relevant interest income was deductible at source under section 194A, and therefore, in view of section 215(5), there was no "assessed tax" on which interest under section 215 could be levied. The Tribunal set aside the levy of interest. The Revenue obtained a reference to this Court on the two questions of law now before it.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that no interest under section 215 could be levied in the assessee's case for the assessment year 1971–72?

Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 194A(3) of the Act, the Tribunal's view that tax is deductible at source under section 194A in the assessee's case and, therefore, there is no assessed tax as defined in section 215(5) on which interest could be levied, is sustainable in law?

Arguments of the Parties

Revenue's Arguments

The Revenue's counsel submitted that the expression "deductible" in section 215(5) should be read as "deducted." Because, on the facts, no tax had in fact been deducted at source from the assessee's interest income, interest under section 215 should be payable by the assessee.

The Revenue pointed out that the banks which paid interest had not in fact deducted tax at source; when tax deductible at source has not been deducted and paid to the Department, those banks (whose duty it was to deduct) can be treated as assessee in default under section 201, and interest can be collected from them under section 201(1A).

The Revenue asked the Court to construe section 215 in light of the practical non-deduction and to hold the assessee liable to interest because the tax had not actually been deducted.

Assessee's Arguments

The assessee's counsel submitted that where tax is deductible at source, that tax should be excluded from consideration when the assessee estimates income for the payment of advance tax (relying on the language of section 190(1)).

It was contended that section 190(1) treats deduction at source and advance payment as alternative modes of paying tax in advance; therefore, where the statute provides for deduction at source in respect of a particular income, the assessee need not (and should not) pay advance tax on that income.

The assessee also relied on the statutory mechanism that where a person required to deduct tax at source fails to do so, that person may be made assessee in default under section 201 and can be charged interest under section 201(1A); this demonstrates that liability for interest on such tax is intended to rest on the person required to deduct, not on the recipient assessee.

Court's Reasoning and Analysis

The Court examined the relevant statutory provisions and their language and applied them to the facts before it. The analysis proceeds through the following steps, as stated in the opinion:

The Court set out the text of section 215(1) and explained its operation: where advance tax paid in a financial year is less than 75% of the "assessed tax," simple interest is payable on the shortfall from 1 April following the year until the date of regular assessment. The Court then focused on the meaning of "assessed tax" as defined in section 215(5).

Section 215(5) defines "assessed tax" as the tax determined on the basis of the regular assessment "as reduced by the amount of tax deductible in accordance with the provisions of ss. 192 to 194, s. 194A, etc." The Court held that therefore "assessed tax" must be understood as the tax finally assessed reduced by the amount of tax deductible in accordance with section 194A.

The Court considered the meaning of the word "deductible" used in sub-section (5). It observed that advance tax is typically paid on an estimate made before final assessment and often long before any deduction at source would actually occur; in many cases deduction at source occurs practically at the end of the year when interest is paid. For that reason the statute uses the word "deductible" rather than "deducted," and it is not possible to construe "deductible" to mean "deducted" in sub-section (5).

The Court relied on section 190(1) to explain that deduction at source and advance payment are treated as alternative modes of payment of tax in advance. Where the statute provides for deduction at source in respect of a particular income, the concerned assessee need not pay advance tax on that income.

Although in the present case the banks paid interest and did not in fact make the required deduction under section 194A, the Court observed that the statutory machinery (section 201 and section 201(1A)) exists to treat the person who fails to deduct as an assessee in default and to fasten liability on that person for the tax not deducted and for interest thereon.

The Court emphasized that interpreting section 215(5) so as to make "deductible" mean "deducted" would produce an anomalous result: it would expose the assessee and also the person (e.g., the bank) who failed to deduct to interest liability on the same tax — i.e., double charging of interest on the same income. The Court considered that the Legislature would not have intended to impose interest on two persons in respect of the same tax and therefore such an interpretation should be avoided.

For these reasons, the Court concluded that where tax is deductible at source under section 194A, the amount deductible must be excluded from the "assessed tax" for the purposes of section 215, even if the tax has not in fact been deducted by the payer; liability for interest in the case of non-deduction is fixed on the person required to deduct under section 201(1A).

Holding and Implications

Holding: The Court answered the two referred questions in the affirmative and against the Revenue — the Tribunal was right in holding that interest under section 215 could not be levied on the assessee in respect of interest income on which tax is deductible at source under section 194A, because such deductible tax is excluded from "assessed tax" by section 215(5).

Direct consequences and costs: The immediate effect is that the levy of interest under section 215 on the assessee was set aside. The Revenue was directed to pay the costs of the assessee; counsel's fee was fixed at Rs. 500.

Broader implications: The opinion reasons from the statutory text and existing statutory remedies (sections 190, 194A, 201 and 215) to avoid a construction that would produce double liability for interest on the same tax. The opinion does not elaborate further on any broader precedential consequences beyond the direct decision in this case.

Commissioner Of Income-Tax, Tamil Nadu-I, Madras. v. Madras Fertilisers Limited

Ramanujam, J.:— At the instance of the Revenue the Income-tax Appellate Tribunal has referred the following two questions of law for the opinion of this court:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that no interest under section 215 could be levied in the assessee's case for the assessment year 1971-72?

2. Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 194A(3) of the Act, the Tribunal's view that tax is deductible at source under section 194A in the assessee's case and, therefore, there is no assessed tax as defined in section 215(5) on which interest could be levied is sustainable in law?”

2. The assessee in this case is the Madras Fertilisers Limited. For the assessment year 1971-72, the ITO has made an assessment on August 28, 1972, on a total income of Rs. 10,28,050. Out of this, a sum of Rs. 10,51,247 is the income by way of interest on dollar short-term deposit. The said interest has been received by the assessee on the surplus funds not immediately required which had been deposited for a short period with the Chemical Bank, New York. Another amount included was short-term rupee deposit of Rs. 51,822.

3. The said deposit was also made in the State Bank of India out of surplus funds not required for a short period. There was another item of income being the interest on. Tamil Nadu Electricity Board Bonds of Rs. 2,934. While making the assessment the ITO levied interest under s. 215 of the I.T Act, 1961 (hereinafter referred to as “the Act”), at the rate of 9 per cent, for the period from April 1, 1971, to March 31, 1972, and at 12 per cent, for the period from April 1, 1972, to August 28, 1972. For the first period the interest levied was Rs. 50,889 and for the second period, Rs. 120,705. This was computed with reference to the then assessed tax at Rs. 5,65,428.

4. The assessee appealed to the AAC and thereafter to the Tribunal. The Tribunal decided the appeal by its order dated September 30, 1975, upholding the computation of the AAC determining the total income at Rs. 95,125 as against Rs. 10,28,050 as originally assessed by the ITO. Regarding the levy of interest under s. 215 of the Act, originally the AAC has not considered that question in detail. Therefore, the Tribunal remitted that question to the AAC for fresh consideration. The AAC held that the levy of interest with reference to the revised total income of Rs. 95,125 under the provisions of s. 215 of the Act was in order. He did not accept the plea of the assessee that it genuinely believed that it had no taxable income and that merely because the Department took another view, interest could not be levied. The assessee took the matter in appeal to the Tribunal on the question of interest to be levied under s. 215 of the Act. The Tribunal, after construing the provisions of ss. 215 and 194A, held that the levy of interest under s. 215 was not in order as the tax was deductible at source under s. 194A of the Act in respect of the items of interest which had been assessed in the assessment and, therefore, there was no deficit in terms of s. 215 of the Act in view of sub-s. (5) of that section. In that view, the Tribunal set aside the levy of interest under s. 215 of the Act. Aggrieved by the view expressed by the Tribunal, the Revenue has sought and obtained a reference to this court on the questions set out above.

5. According to the learned counsel for the Revenue, though sub-s. (5) of s. 215 of the Act uses the expression “deductible”, that expression has to be understood as “deducted” and that if that section is understood in that manner, since no tax has been deducted factually in this case at source from the interest income, the interest is payable as per the provisions of s. 215 of the Act. On the facts of this case, there is no dispute that so far as the interest income of the assessee is concerned, the tax is deductible at source. But in this case no such tax has in fact been deducted and consequently there has been no payment to the Departments towards the tax due on the interest income. The fact that the bank which paid interest to the assessee has not in fact deducted the tax at source is not disputed by both sides. If the tax deductible at source has not been deducted and paid over to the Department, then the banks whose duty it is to make deduction can be treated as the assessee in default under the provisions of s. 201 of the Act. Interest also can be collected along with the amounts which they ought to have deducted but which they did not deduct under s. 201(1A). Therefore, under the provisions of s. 201, that portion of the tax which has not been deducted and paid over to the Department will have to be paid with interest by the banks which are under a duty to make the deduction at the source. We have thus to keep in mind s. 201(1A) of the Act while construing s. 215 of the Act which deals with the interest payable by the assessee in respect of the tax assessed on him. Section 215(1) of the Act proceeds as follows:

“215. Interest payable by assessee:— (1) Where, in any financial year, an assessee has paid advance tax under section 212 on the basis of his own estimate and the advance tax so paid is less than seventy-five per cent. of the assessed tax, simple interest at the rate of twelve per cent, per annum from the 1st day of April next following the said financial year up to the date of the regular assessment shall be payable by the assessee upon the amount by which the advance tax so paid falls short of the assessed tax.”

6. This section provides that when the advance tax paid is less than seventy-five per cent, of the assessed tax, simple interest at the rate of 12 per cent, per annum shall be levied from the 1st day of April next following the said financial year up to the date of the regular assessment, on the amount by which the advance tax falls short of the assessed tax. The “assessed tax” has been defined in s. 215(5) of the Act, as “meaning the tax determined on the basis of the regular assessment as reduced by the amount of tax deductible in accordance with the provisions of ss. 192 to 194, s. 194A, etc. As per this definition, assessed tax” represents the tax determined by regular assessment as reduced by the amount of tax deductible in accordance with the provisions of s. 194A of the Act. Therefore, the expression “assessed tax” used in s. 215(1) of the Act has to be understood as the tax finally assessed as reduced by the amount of tax deductible in accordance with the provisions of s. 194A of the Act. As already stated, that tax is deductible at source on the interest income under s. 194A of the Act cannot be disputed. So long as s. 215 of the Act permits the levy of interest only on the difference between the assessed tax and the advance tax actually paid, we have to take note of the amount of tax deductible at source under s. 194A of the Act, and this has been specifically provided in sub-s. (5) of s. 215 of the Act. It is significant to note that normally advance tax is paid either on the basis of the previous year's assessment or on the basis of the estimate given by the assessee long before the final assessment and at that stage, there is no question of actual deduction of the tax at source in respect of the interest income and the deduction at source takes place practically at the end of the year when the interest is paid and it is for this reason the statute in sub-s. (5) of s. 215 of the Act uses the expression “deductible” instead of “deducted”. Therefore, in construing sub-s. (5), it is not possible to understand the expression “deductible” occurring therein as “deducted”.

7. Further, the learned counsel for the assessee appears to be right in his submission that in cases where the tax is deductible at source, that will have to be excluded from consideration while the estimate of the income for the payment of advance tax is submitted. Reliance is placed by the learned counsel on the language used in s. 190(1) which is as follows:

“190. (1) Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction at source or by advance payment, as the case may be, in accordance with the provisions of this Chapter.”

8. That section seems to provide that the tax in respect of a regular assessment is payable either by deduction at source or by advance payment, as the case may be, in accordance with the provisions of Chapter XVII. Thus, the deduction of tax at source and payment of advance tax have been treated as two alternative modes of payment of tax in advance. Hence, where the statute provides for deduction of tax at source in respect of a particular income, the concerned assessee need not pay any advance tax in relation to the said income. In this case, it is not in dispute that in respect of the interest income, deduction of tax at source is contemplated under s. 194A of the Act. However, the deduction at source has not been effected by the banks which paid the interest to the assessee which they should have done as per the provisions of the Act. For the default of compliance with s. 194A, the bank can be brought under s. 201 as an assessee in default. Section 201(1A) specifically provides that if a person or authority who is bound to make a deduction of tax at source as contemplated by the statute does not deduct or after deducting fails to pay the tax, then such a person or authority is liable to pay simple interest on the amount of tax not deducted from the date on which such tax was deductible to the date on which the said tax was actually paid. Thus, in respect of interest income on which deduction of tax at source should have been made, the liability to pay interest is fastened on the person or authority who failed to make deduction as required under s. 194A. Therefore, in respect of the tax payable on the said interest income, the assessee also cannot be taken to be liable to pay interest. Otherwise, it will mean that there are two persons under the Act to pay interest on tax on the same income. The Legislature would not have contemplated such a situation where in respect of the tax on interest income, two persons are liable to pay interest for the delayed payment of tax. We are, therefore, inclined to hold that wherever there is a possibility of a deduction of tax at source, the person who had failed to deduct tax at source is liable to pay interest and not the assessee, as otherwise, there will be charging of interest twice on the payment of tax in relation to the same income. Such an interpretation should normally be avoided. In this case, therefore, the Tribunal appears to be right in holding that in terms of s. 215 interest could not be levied on the assessee on the tax which is deductible at source. We answer the said questions referred to us in the affirmative and against the Revenue. The Revenue will pay the costs of the assessee. Counsels fee Rs. 500.

Tax Case No. 391 of 1978 (Reference No. 211 of 1978)

Commissioner Of Income-Tax, Tamil Nadu-I, Madras. v. Madras Fertilisers Limited

Case Summary — Opinion of Ramanujam, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue's Arguments

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, Tamil Nadu-I, Madras. v. Madras Fertilisers Limited

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